Macro Logic: Ad Hominem? Check. Hitler? Check. Appeal to Authority? Check.

A person identifying himself or herself as "Daniel-Silviu Ioni??" sent me some poison emails over the weekend, apparently in response to my post on Peter Schiff's QE3 rant, which I didn't realize got a bunch of comments. 

Now, I understand that Schiff's wooly fulminations are not everybody's cup of tea, but this response was a pretty striking specimen of how macroeconomic true believers think and talk. First up: the accusation (and I plead guilty as charged!) of being insufficiently respectful of the tortured math and double-reverse logic late Keynesian theory demands: 

[S]ince it is more than obvious that you are completely ignorant on macroeconomic matters (otherwise you'd realize what a clown Schiff is) - what exactly makes you think that you are qualified to comment?

Next comes a hysterical warning of the chaos that will ensue if the great unwashed are allowed to use money that both strengthens and weakens depending on market conditions. This one features a comparison to World War II (which, my lying history books failed to tell me, had its root cause in deflation of the mark during the Weimar Republic): 

If this were some sterile academic debate, I wouldn't give a damn on what ignorant bystanders think. But the stakes are real and oh-so-high. You might want to remember what happened last time when the world went through a similar slump (hint - the Soviets got their paws on half of Europe - thankfully, the unwashed half - and two atom bombs fell on Japan). 

Finally, an expert to the rescue: 

PS I took the liberty of attaching a .pdf economics textbook [by Greg Mankiw, George W. Bush's CEA chairman], since you are badly in need of one. 

The interventionists' pants-soiling bloviation about deflationary catastrogeddon is in its way the flip side of the claims by Schiff and others that hyperinflation is right around the corner. Clearly the light-speed devaluation of the dollar (at least relative to other currencies) continues not to happen. But so does the recovery indicated by macroeconomists. My point is that "under control" inflation is doing damage to American balance sheets and savings rates that rarely gets mentioned. It's been six years since the top of the real estate market. It's fair to note that medium-level pain over a long period of time is not necessarily better than massive pain over a short period of time. 

In any event, I am well aware that I'm not an economist by training. I welcome challenges to what I'm sure are my many lacunae and blind spots. But in this case I have to echo Schiff: Is this really all you've got? 

Comments

[Spencer]

Of course that's all they've got. What they really mean, however, is that if THEY aren't qualified to understand, then how in the hell could you be? I mean, obivously they are smarter than you are...

It's idiocy. Just because they can't understand the data doesn't mean it takes a genius to. It's pretty simple really. math is math is math when it comes to this stuff. Basic economics still apply.

[Scruffy Nerfherder]

EXTERNALITIEZZZZZZZZZ!!!!!!

[Scruffy Nerfherder]

Externalities, BITCHES!

[VG Zaytsev]

multipliers
aggregates
demand side drop
oh my god no...
DEFLATION

[Paul.]

Personally, I tend to listen more than I comment on the financial threads because it seems that we've got some truly knowledgeable posters who can get into the dirty details.

However, the longer these economic doldrums stretch out, the more my base, simplistic view seems to hold true: A government's budget actually is a lot like a household budget...

[darius404]

Ditto. It's ridiculous when people come on here and claim that the U.S. government is somehow exempt from all the normal rules. The most explicit attempts were from that Draco person:

As far as the ballooning of the debt during the Reagan era, it had no deleterious consequences (as we can see from the fact that the debt is much, much bigger now, still with no deleterious consequences). It's a number, and has no similarity to the debt that the private sector (like households) accrues.

And:

The US government, as a currency issuer, can always make payments on the public debt. There is no reason to ever pay down the debt, but of course a very good reason to make the interest payments. There is no crisis here. Just a gigantic misunderstanding. People who think "we have to pay off the debt someday!" just aren't thinking straight.

[Almanian's Evil Twin]

So "Daniel-Silviu Ioni??" - if that's his REAL name - didn't drop a "so's your old man"?

Then he's an utter fraud. TIMMEH wins!

[darius404]

If I had to make a wild guess, I'd say "Da worm" from the comments finally decided to respond to Cavanaugh himself. The email passages reek of the insulting and condescending tone he used. Probably pissed that we didn't buy his claims like "All central banks have absolute power over nominal spending."

[Red Rocks Rockin]

That "THE STAKES ARE TOO HIGH FOR DEFLATION A BLOO BLOO BLOO" is exactly the kind of emotive, math-free response I'd expect from someone desperately defending a policy that's done nothing but destroy the value of a dollar for the last 100 years.

Hey, Daniel-Silviu Ioni??, I hope you're stuck smack in the middle of some Free Shit Army hellhole when the masses finally realize that Da Gubmint can't cover their GIMME DATS anymore.

[Virginian]

http://theeclecticdragonfly.bl.....r-day.html

Remember, inflation is a myth.

[Corning]

inflation is a myth.

If by myth you mean monetary phenomenon then yes you are correct.

[SugarFree]

This dipshit is making the rounds. He was hurling his feeble abuse over at Urkobold over the weekend.

[Almanian's Evil Twin]

Oh, Maaaaaaary! We love when she comes out in another disguise. Esp when she pretends to be a man!

[Paul.]

This doesn't feel like Mary.

[Scruffy Nerfherder]

I don't want to know how you know what Mary feels like.

[Paul.]

Hey, she could be eight kinds of hot! We just don't know! Plus I have a well-established reputation for leaning towards the crazy.

[Episiarch]

WTF are you talking about, Paul?!? We saw her pictures when heller outed her. She's horrible.

[Paul.]

How'd I miss that? Link?

[Episiarch]

Oh, she burned every one of her sites that very day, though I think some people saved the pages out. Maybe one of them can show them to you.

[Paul.]

Oh come on now... you tell me there are photos of Mary Stack, then you say your dog ate them?

[Corning]

Oh, she burned every one of her sites that very day, though I think some people saved the pages out. Maybe one of them can show them to you.

I can't even find "a wiki called reason" any longer.

This place has gone to hell.

[pmains]

Was she the obese paralympic power-lifter?

[Paul.]

Nah, I've seen those. Can't be. Can't be.

[Episiarch]

You mean dunphy?

[Killazontherun]

I went a googling, pre-botox Mary?

http://ama-cdn.com/sites/defau.....546972.jpg

[Karl Hungus]

I don't want to know how you know what that Mary feels like a horse eating oats out of your hand.

[Almanian's Evil Twin]

That's what she said

[Scruffy Nerfherder]

Occutard redux

[BakedPenguin]

Here's the Urkobold post. I replied (because at Urkobold, we like to encourage trolls) regarding the tripling of monetary base in 3 years, and he responded with a Wiki link to velocity of money. That's when you know you have been trolled by a master.

[johnl]

You mean the point at which he admits that even controlling M0 doesn't let you control interest rates? Yes that sounds like a troll, except that he's mailing TC.

[Corning]

From Urkobolt comments:

Daniel I said...

You people might wanna learn about stuff like this

http://en.wikipedia.org/wiki/Velocity_of_money

September 14, 2012 12:17 PM

Are we sure this is not Shrike?

I remember him using the velocity of money before.

[Paul.]

You know who else used the velocity of money?

[Corning]

The irony is their misunderstanding of the term stems from a misunderstanding of physics.

They think "velocity" is the tendency of money to inflate over time.

Of course in physics velocity can be zero or hell even negative. And it can change at anytime. It is a neutral term. Not implying up or down or propensity If velocity of money meant what they wanted it to mean it would be called "the inflating inertia of money".

[VG Zaytsev]

The ironic thing about his comment is that velocity has decreased in the last four years.

But it will come roaring back when banks begin lending out the excess reserves, accelerating inflation even more.

[Killazontherun]

How long have you guys been around? Velocity of money is always their back up plan.

[The Hammer]

I wonder if Palin's Buttplug and Tony are proud of the level of discourse and intellect on their side of the debate?

[Killazontherun]

They set the standard.

[OldMexican]

[S]ince it is more than obvious that you are completely ignorant on macroeconomic matters (otherwise you'd realize what a clown Schiff is) - what exactly makes you think that you are qualified to comment?

Here's a good way to show just how batshit nutty is the macroeconomic view:

Imagine you have an island with four people. Three are in charge of going into the sea and fish, and the fourth is in charge of eating the fish. The lucky bastard gets to eat three fish a day as caught by the three companions. In macroeconomic terms, the GDP of the island is three fish. Instead, using real economics, the fishermen are just about to throw the eater into the sea to feed the fish, because their opportunity cost is three fish they cannot eath themselves.

Simplistic, to be sure, but that is how macroeconomists (or those that subscribe to the macroeconomic view) really think: They totally dismiss opportunity costs and capital formation as useless distractions.

[The Derider]

This is completely untrue.

[Episiarch]

Shut the fuck up, joe. Don't you have a racehorse to ride somewhere?

[Sevo]

The Derider| 9.17.12 @ 6:40PM |#
"This is completely untrue."

Jeeze, deidiot, you left out 'jo mama!'

[Dunphy (the real one)]

yea, but it's COMPLETELY untrue. that's like with a cherry on top double secret probation!

[Killazontherun]

Your barter economy is completely meaningless when the fourth guy goes down to the beach and collects all the shells. He then has all the money and though the fishermen have the fish, they are in effect broke due to not having any of the money.

[VG Zaytsev]

+1

[BG]

Without getting into the merits of "the macroeconomic view", I'm not sure what policy that analogy is supposed to be describing or criticizing.

The example you described does not really illustrate opportunity costs. If my opportunity cost is "one fish per day" that would mean I gave up my opportunity to eat a fish by spending the time and resources I would have needed to catch one doing something else besides fishing.

Capital formation is also not hinted at here. Capital formation in this context would be like if for a few weeks, I spent only every other day fishing, and used my off days to build a better net that will double my catch. In the short term, not as many resources go towards producing the end product used by consumers. In the long term, though, the existence of capital increases output of that end product.

Your hypothetical island economy is more analogous to an economy where the government (the fish eater) imposes a 100% income tax on income at all levels. (It is actually a 100% production-for-own-use tax levied in kind rather than in currency).

[Paul.]

A person identifying himself or herself as "Daniel-Silviu Ioni??" sent me some poison emails over the weekend,

Sounds like you got your own personal embassy riot, Tim...

[Proprietist]

We free marketers often vastly misinterpret Keynes as badly as most Keynesians do.

Keynes wanted the government to generate budget surpluses, cut spending and pay down the debt in boom times so when the business cycle crashes, taking on some debt and spending to get us through the recession will ideally not require higher taxes, monetary devaluation and insurmountable debt.

As a libertarian who believes the government has some valid, minimal functions, I would think this would be a perfectly logical way of operating - if the revenues fall in a recession and the government is already operating withing the boundaries of the Constitution and has already limited spending and taxes to minimal levels, I could understand having some debt to maintain the basic functions (like the military, police, courts, etc.) I could even agree with the benefits of doing some infrastructure investment (like updating interstates and crumbling bridges) in a recession to spur some temporary, stopgap employment.

Keynesianism never meant a free check for a government to run a deficit every year and print and spend money ad infinitum. I think as a practical measure, Keynesian Constitutionalism is probably more logical than a balanced budget amendment, as politicians can not necessarily predict the coming economy when allocating a budget.

[Scruffy Nerfherder]

Problem is, the motivations are all wrong. If a bubble bursts, the first thing a politician wants to do us prop up the market. When what is needed is a real location of capital. Only the free market does that effectively.

[fried wylie]

real location of capital

Eh, I think it works as well as the intended wording (re-allocation).

[Virginian]

Except you're assuming that the surplus won't be used to pad the pockets of cronies. That's what the stimulus did, that's what every stimulus in history has been: distribution of the wealth of the politically powerless to the politically connected.

Rather then worry about the entirely theoretical problem of government not having enough money to execute its constitutional functions, lets worry about the actual problem of them being completely out of control spending wise.

[Proprietist]

That's in practice, because we all know government is inherently corrupt. However, if all surpluses are used to pay down existing debts or put into a "lock box" for recession spending on legitimate functions (or in reality, unfunded entitlements),

In theory, what Keynes was supporting makes sense - that how the government should react to a recession or a boom is somewhat counterintuitive. Government uses tax revenue in a boom as an excuse to go on a spending spree, when that's the time they should be extremely conservative. In a recession, they start raising taxes to keep their preferred programs afloat or to maintain some semblance of a balanced budget, which merely makes the recession worse.

[Virginian]

Eh, I'm not sure what the word for my viewpoint is (I'm sure there is one) but basically it boils down to this:

The main test of a theory is how it functions in the real world. The arguments I hear in defense of Keynesian theory are very similar to the ones I hear in defense of Marxist theory. Wonderful, elegant systems that would function beautifully if there were impartial AIs or angels organizing society.

[Proprietist]

What about the defense of the free market theory: "we don't have a free market, therefore this system does not reflect how a free market would work."

Keynes, Smith and Marx have all been violently misinterpreted because of the ways their systems have been executed politically.

Smith: "His ideology creates so much wealth that I can easily funnel what I want off the top of it."

Keynes: "His ideology gives me an economic excuse for endless spending and cronyism."

Marx: "His ideology grants me infinite control over everyone via an army of useful idiots under the guise of populist revolution."

I prefer to take them at face value about what they actually believed and supported instead of tying them to every crappy politician's misinterpretations of their ideologies for their own political purposes.

[VG Zaytsev]

In theory, what Keynes was supporting makes sense - that how the government should react to a recession or a boom is somewhat counterintuitive

Not only that, but it's not that different than how sane responsible individuals would act in a free market economy.

Save during the good years and dip into savings during the bad years.

It's ironic that Keynesians always say that governments should not have the spending behavior of households, when he was actually saying that they should.

[Paul.]

As a libertarian who believes the government has some valid, minimal functions, I would think this would be a perfectly logical way of operating - if the revenues fall in a recession and the government is already operating withing the boundaries of the Constitution and has already limited spending and taxes to minimal levels, I could understand having some debt to maintain the basic functions (like the military, police, courts, etc.)

Except Keynsianism didn't talk much about utility, it talked about stimulus. Yes, you may have to bust a debt ceiling to keep the government basic functions running during the zombie apocalypse. But the idea that you can stimulate your way to a turnaround is dubious. It may work in the short term...

[The Derider]

But in the long term we're all dead.

[Virginian]

This is the long term, and Keynes is dead. We're stuck with his fucking mess.

[Corning]

1945 to 1950 is a pretty short term long term.

Only 5 years from huge slashes to the budget to astonishing economic boom...I think we can survive it.

[The Derider]

Kenesians support a counter-cyclical fiscal policy-- they approve of those cuts.

[MJGreen]

The prominent ones didn't approve of those cuts at the time.

[Proprietist]

I'm not sure Keynes says government employment in a recession is the solution to the recession. I think he's saying infrastructure spending in a recession can both temporarily help unemployment and improve the private sector in the long run by both improving public infrastructure that the private sector uses and by putting money back into circulation that the government had "saved" from the boom times.

But the government isn't saving anything up in the high points of the business cycle. It basically runs perpetual deficits, and the purported infrastructure investment is mostly wasted on absolute garbage and propping up moral hazards in the market by subsidizing failure. I don't think any of these things were what Keynes were advocating, so I'm hesitant to call it "Keynesianism". It would be like saying Adam Smith obviously supported monopolies and corporate welfare - a straw man.

[OldMexican]

Re: Proprietist,

Keynes wanted the government to generate budget surpluses, cut spending and pay down the debt in boom times so when the business cycle crashes, taking on some debt and spending to get us through the recession will ideally not require higher taxes, monetary devaluation and insurmountable debt.

Keyne's assumption that boom-bust cycles were a natural phenomenon is what made this recommendation that more absurd. In the first place, the thought that a government would simply stop spending during boom times to accumulate surpluses is naive. In the second place, history has shown that, during a recession, the best thing is for government to reduce spending and cut taxes: the 1920-1921 Great Depression, which ended very quickly after the Harding and then the Coolidge administration reduced spending and cut taxes. And this happened BEFORE Keynes had published his General Theory.

[Corning]

We free marketers often vastly misinterpret Keynes as badly as most Keynesians do.

Keynes wanted the government to generate budget surpluses, cut spending and pay down the debt in boom times so when the business cycle crashes, taking on some debt and spending to get us through the recession will ideally not require higher taxes, monetary devaluation and insurmountable debt.

Yes all true but it is a bit like when we criticize Stalin and the Marxists claim that is not what Marx wanted.

[Proprietist]

I'm all for reading Marx at face value and calling Stalin a state socialist instead of a Marxist. As I mention above, it's like pinning the flaws of the current market system on Adam Smith.

[Corning]

I'm all for reading Marx at face value

But that is a reading not an implementation. Stalin is an implementation and i think there is good evidence that the innate elements of any attempt to implement Marx will lead to failures similar to Stalin's failures.

Similarly Keynesism has innate flaws which will lead to the flaws we see in its current implementation. Specifically Keynes advocates for huge spending. By opening this door and giving the power and legitimacy for the government to spend so recklessly you are left with a government that will not save, cut and act responsibly during good economic times. No matter that Keynes did not want it that way. The very nature of his thesis lead to implementation that ignored limiting portions of his thesis.

[Sevo]

"Keynes wanted the government to generate budget surpluses, cut spending and pay down the debt in boom times so when the business cycle crashes, taking on some debt and spending to get us through the recession will ideally not require higher taxes, monetary devaluation and insurmountable debt."

The problem here is exactly what demolished communism; they both rely on a fantasy.
Keynes needs a government that runs a surplus and reduces debt. Communism needs the 'new Soviet man'.
Neither have ever been shown to exist.

[Proprietist]

Has a free market ever been shown to exist in practice? That's not going to make me stop supporting or believing in it.

[toolkien]

I agree that Keynes didn't mean for a government to run deficits for 30 years even when the economy was booming. But it stands that Keynes belonged to a set of people who were elitists and it stands that they deemed to think that they know/knew better than others. It stands that when the government takes from one to give to another, it is cancelling out the values of one and replaces with the other. It stands that when money stands on the sidelines, it does so for a reason, and at some point man's desire to expand and to make greater from lesser WILL eventually kick in (only to overextend itself and create the next downturn this is known basically as the business cycle). To force money off the sideline only creates a level of uncertainty that only prolongs the reluctance to voluntarily invest. All this without even the dyed-in-the-wool political pull aspect that's is the ace in the hole. In the end, again, man will endeavor to make greater from lesser, and at best the notion of stimulating the recovery in a shorter period is a mirage. And like all Forceful interventions, when all benefits and costs are measured, causes more harm than good.

[MJGreen]

Have you read Buchanan's Democracy in Deficit? He argues that Keynes and his followers eventually destroyed the prevailing balanced budget rule. "Surplus in good times, deficits in bad," was always the case, due to basic realities of finance (tax receipts fall during a recession). The problem is that macroeconomists, building on Keynes's legacy, found any number of ways to claim that the economy was actually underperforming, thus a deficit was needed to reach full employment. This slippery system combined with the mechanics of democratic government, and we now have exactly what you'd expect.

Your "Keynesian Constitutionalism" is probably better than a strict balanced budget restraint (as in, every single year the budget must be balanced), but it's not Keynesian by the fact that it calls for surplus then deficits. To be Keynesian, you have to start talking about idle resources, the disconnect between savings and investment, the multiplier, etc.

[MJGreen]

To put it another way, Buchanan argues that the popular notion that the government is run like a household (save in the good times, use those savings or borrow if you must to stay alive during the bad) is more effective than the notion that government can restore full employment when savings outpace investment. If in both scenarios the desired outcome is surplus-deficit-surplus, the former notion is effective. The latter notion inexorably breeds overspending.

[Proprietist]

I do agree that Keynes and his followers believed in managing the economy and the money supply far more than I or any libertarian would ever advocate. I think my point is more that we shouldn't write off Keynes just because the Left and statists have abused his ideas beyond recognition. He made valid points and there are certainly aspects about his economic philosophy worth addressing and/or endorsing.

I even think libertarians have plenty to learn from Marx and Hegel, and that they brought valid points even if their economic and political ideas were deeply flawed.

[The Derider]

Instead of arguing with random internet trolls, and projecting their foibles onto 95% of economists, why don't you respond to the arguments made by actual economists?

Like this one:
http://krugman.blogs.nytimes.c.....ket-funds/

[Paul.]

Should we post the link with the Spanish economist tearing Krugman a new one?

My favorite bit from that (paraphrased): It was your (Krugman's) thinking and methodology that got us into this mess, and now you try to tell us that you're the only ones who can get us out of it..."

[The Derider]

Please do.

[Paul.]

http://www.zerohedge.com/news/.....-take-down

[Dunphy (the real one)]

i'd like to see a french version of same economic bitchslapping?

tia!

[SIV]

Krugman? Is THAT all you've got joe?

[OldMexican]

Re: SIV,

Krugman? Is THAT all you've got joe?

Yes, that is all that he's got.

[Red Rocks Rockin]

why don't you respond to the arguments made by actual economists

Because "actual economists" are arguing that the only solution to a debt-induced recession is....issue even more debt. Demonstrating that "actual economists" don't know what the hell they are talking about.

[General Butt Naked]

Who gives a fuck what an "actual economist" thinks, dipshit?

Those fucking fucks can't even make predictions that do better than chance. That's right peenrip, a penny tossed into the air is a better predictor than an MIT educated cockstain like Krugman.

[Corning]

Those fucking fucks can't even make predictions that do better than chance.

All the peer reviewed literature published over the past 5 years all disagree with Krugman.

Don't think all economists or even a majority are agreeing with the likes of Krugman.

[General Butt Naked]

Oh fer sure, it's just that certain segments of our population (many of them policy makers)grant an almost magical ability onto certain economists (usually the ones that want to grant more power to policy makers) to predict the future.

[Rufus J. Firefly]

Do you have a link or site to the peer revieweed literature? I would love it. I'm restricted to watching Krugman get pummelled on youtune and even at Foregin Policy for his shitty political outtakes.

[Rufus J. Firefly]

Ugh. Make that "reviewed," "pummeled" and "foreign." Sorry, folks.

And if 'youtune' ever becomes big, I own the rights! You read it here first.

[Corning]

It is Cato but follow the links. They go to many places that are not Cato

http://www.cato-at-liberty.org.....ic-growth/

Also this

http://www.voxeu.org/article/d.....-revisited

[Dunphy (the real one)]

well, all good roads lead to cato.

[Corning]

You did not do that!

You did not just cross that Rubicon!

[Jordan]

Because "actual economists" engineered the housing bubble and were shocked when it blow up.

[Corning]

When was the last time Krugman published a peer reviewed paper?

How about the peer reviewed paper on microeconomics?

Krugman is just another troll commenter no more legitimate then you or I.

If you are going to make an appeal to authority then at least find an authority that has looked at the subject.

[Sevo]

The Derider| 9.17.12 @ 6:39PM |#
"Instead of arguing with random internet trolls, and projecting their foibles onto 95% of economists, why don't you respond to the arguments made by actual economists?"

Deidiot, one number: 1989.

[Corning]

But consider a more recent innovation: money market funds. Such funds are just a particular type of mutual fund ? and surely the Austrians don't want to ban financial intermediation (or do they?). Yet shares in a MMF are very clearly a form of money ? you can even write checks on them ? created out of thin air by financial institutions, with very few pieces of green paper behind them.

So are such funds illegitimate? What about repo, which has many of the same features?

One of the key lessons of the 2008 crisis was precisely that banks are defined by what they do, not by what they look like, and there are a whole range of financial arrangements that in economic terms act a lot like fractional reserve banking. So would a Ron Paul regulatory regime have teams of "honest money" inquisitors fanning across the landscape, chasing and closing down anyone illegitimately creating claims that might compete with gold and silver? How is this supposed to work?

hey look not only does Krugman lie about what Ron Paul has said but joe doesn't even know Ron Paul advocates for competing private and public currencies.
Wow Joe you really fell had for that strawman.

Pathetic really.

[Cytotoxic]

THIS IS WHAT KRUGMAN ACTUALLY BELIEVES.

[Cytotoxic]

1) An actual economist

2) Krugman

Pick one.

[SIV]

Full employment is right around the corner.
Go long banknote paper and wheelbarrow-wallets!

[Ken Shultz]

It's fair to note that medium-level pain over a long period of time is not necessarily better than massive pain over a short period of time.

Especially if the "pain" is actually the solution to the problem.

[Bill Woolsey]

Sadly Cavanaugh, Ionta is more or less correct.

You could do with a brief review of Mankiw's principles text. I don't agree with Mankiw, but it is at least in the right ball park.

It is true that the deflation and depression in Germany was more responsible for Hitler's rise than the inflation (not that the inflation wasn't horrible.)

All of this business about inflation and the quantity of money _is_ macroeconomics. Your understanding of it appears to be simplistic and wrong, but it is macroeconomics.

In my view, everything you write is too fixated on real estate. It is like you see monetary policy as being about housing prices.

But the real problem is that you are _managing editor_ of Reason and close to nothing sensible on inflation, recession, and money sees the light of day. It seems that nothing sensible gets buy your continual confusion of money, credit, and focus on real estate.

[Paul.]

In my view, everything you write is too fixated on real estate. It is like you see monetary policy as being about housing prices.

Uhm, it seems to me that the Obama Administration sees housing prices as being about the economy.

[wef]

More directly to Mr Woolsey's complaint, the central bank is in fact directing this QE3 money-making at buying up mortgage-backed securities. This is definitely not neutral, and is expanding "high-powered money" in a way the directs the injection at a particular policy goal, not a general liquidity goal. This is indeed a real-estate-contaminated program.

[T o n y]

The primary force holding back the economy at large is the housing sector's weakness. Obviously creating another housing bubble is the worst possible action--you gotta somehow make real demand for housing. That's prolly why Bernanke insists that Congressional action (which I would boil down to downward redistribution) is the only real solution.

[Contrarian P]

How exactly is "downward redistribution" (whatever the hell that means) supposed to create housing demand? People buy houses when they have what they perceive to be stable jobs. In the current economic environment, that's far from the case. Obamacare and the continual tax the rich/business drum (among other factors) have created a large amount of uncertainly and unwillingness to risk capital in the marketplace. In practical terms that means that business is reluctant to expand and hire workers, instead trying to streamline their workforce (i.e. letting people go or outsourcing) in anticipation of higher labor costs and taxes down the line. No hiring equals no stable jobs equals no demand for housing. Why is that so hard to comprehend?

[T o n y]

I will agree that market uncertainty is a factor, but not that it's (entirely) the fault of Obama's policies. The inability of Congress to come to any basic agreement on even short-term fiscal policy not only largely contributes to marketplace uncertainty but is what has caused avoidable and serious damage to the weak recovery (the downgrade). That's Republicans' fault in my book, since they are extremists unwilling to compromise on anything.

But I think it makes more sense to put demand at the heart of it. What's different about this era than any other that makes companies more likely to be efficient? It's just especially easy for them now because it's a buyer's market in labor, and the market is increasingly global.

I'm not saying confiscating excess wealth and writing checks to the rest to even things out. Though it would probably be more economically productive than anything supply-siders are advocating. I just don't see how you increase demand without finding a way to increase employment and wages, which is to say, demand.

[Cytotoxic]

We have lots of demand. And no real recovery.

[John Thacker]

No, that's not what Bernanke say or said. It's definitely not what he said to Japan.

He has for some reason indicated that he would prefer fiscal stimulus, but his entire track record of research and previous public statements belie that.

I subscribe to the theory that he's had difficulty getting the Fed Open Market Committee to go along with him. Perhaps he's radically changed his views on Japan and the Great Depression, though.

[Calidissident]

Why do we need to have housing at a certain level of demand?

[Auric Demonocles]

Excellent question.

Another question: if we want housing to be in more demand, why are we propping up the prices of it? If prices dropped as much as they should have after the mortgage collapse, I would almost certainly have bought a house/condo.

[Corning]

It is true that the deflation and depression in Germany was more responsible for Hitler's rise than the inflation (not that the inflation wasn't horrible.)

Deflation is a result of an economic slow down not the cause.

In fact a simple glance at a supply and demand curve tells you lower prices increase demand.

The deflationary spiral is a myth wrapped in bullshit.

In fact deflation is an integral part of s healthy economic recovery. Shit fucked up to cause the down turn and prices need to adjust to that new reality.

[Paul.]

Hell, I'm just wondering when Gas is going to drop back down to $4 a gallon.

[T o n y]

"Shit fucked up" = lax oversight of exotic financial instruments and consumer abuse. True, diagnosis isn't cure, but even if you don't buy the specific narrative you admit that the market failed ("shit fucked up"). If the market is so pure that "shit fucking up" is to be hailed as a virtuous aspect of the system, then I don't see why it comes as a surprise if people come along who think trying to prevent "shit" from "fucking up" might be prudent.

And what's so difficult to grasp about a deflationary spiral? Lower wages (demand) lead to lower prices which lead to lower wages which lead to lower prices, etc. Why is that not possible? No economics school has shown with evidence that the market alone has a completely nonmarket-related magical ability to maintain civilized levels of wages and employment. And if you accept that as part of reality, then, again, don't be surprised if it's seen as legitimate to try to improve upon that obviously nonideal situation.

[Jordan]

A central-bank-created bubble bursting is not a "market failure."

If the market is so pure that "shit fucking up" is to be hailed as a virtuous aspect of the system, then I don't see why it comes as a surprise if people come along who think trying to prevent "shit" from "fucking up" might be prudent.

Because those same people are the ones who fucked it up in the first place by doing the exact same thing.

[Contrarian P]

Tony, your continuing deliberate omission of the government's central planning being a root cause of the economic meltdown is truly amazing. Federal policy deliberately created and inflated the housing bubble through essentially mandating the eliminating of mortgage standards and the implied guarantee of a bailout when the system blew up. Why is that so hard for you to admit? Central planning of the economy has not produced the results you wanted, so your argument is that we need more and more of it. Your idea of a market failure is that your central planning of the market didn't get the result you wanted. Tony solution? I'll bet nobody saw this one coming...more planning!

As to your last point, deflation happens. Prices on certain items decrease over time. A 42" plasma TV would have cost you 35 thousand bucks fifteen years ago. Now, the same TV with far more features can be had for less than a thousand dollars. Lower prices are not a bad thing and do not automatically lead to lower wages.

No economics school has managed to show that the type of market intervention you advocate produces prosperity either with real world results. A computer model does not equal reality. The market responds to the conditions of the world as it is, not as you or politicians would like it to be. The efforts you see as trying to improve on the system actually make things worse.

[T o n y]

I've said before I'm willing to place almost all blame on "central planning" or government policy, but that it includes inadequate policing of the market. I just don't believe in a system free of policy, though a system that doesn't subsidize housing demand is not necessarily bad (I'm a proud renter-by-choice). But mere tax benefits to encourage homeownership and such are in theory indefinitely sustainable. The unsustainable problem was mostly the result of market movement that depended on the ability of the investment class to distribute risk away from themselves and onto the whole system, thus encouraging the exploitative lender practices, which was far more causative of the housing bubble than any government subsidy program.

[Calidissident]

Tony, we have over 100 financial regulatory agencies. We have countless rules, that only increased in number under Bush. Why are we to believe that one more agency and/or a few more rules will solve the problem. Why should we believe government bureaucrats will foresee all these problems that financial analysts, economists, politicians, etc did not see?

[T o n y]

We can certainly foresee the problem of too much interconnectedness and redistribution of risk in the market. If investment banks were able to fail without causing systemic problems (in large part because of their being allowed to be under the same umbrella as normal banks), a policy this country once held, the problem wouldn't have necessarily been bailout-requiring. "Too many rules vs. not enough rules" is too vague. You have to have the right rules. And I don't believe there is no such thing as no rules. "There are no rules" is still a rule.

Rand acolyte Alan Greenspan has said all that needs to be said about the problem: too much faith was put into the rationality of private market actors.

[Sam Grove]

The unsustainable problem was mostly the result of market movement that depended on the ability of the investment class to distribute risk away from themselves and onto the whole system, thus encouraging the exploitative lender practices,

Don't leave your analysis at that. Why and how did this happen?

People are in business to make profit (a constant). If the government intervenes in such a way as to produce the above behavior then why blame people for acting predictably in response to government created conditions? After all, the government "wanted" them to act that way.

If you want government to be the market manipulator/controller, then you must also hold government accountable for the results.

[T o n y]

That's what I said. All the blame can be placed on government for having incorrect policy. The relevant question is "what is the correct policy?" What are you guys offering that differs from 2007-era policy, except obsessions with minor subsidies?

[Cytotoxic]

Shorter Toney: the government fucked up by not fucking things hard enough. MORE FUCKING

[darius404]

The relevant question is "what is the correct policy?"

The relevant answer?: "Abolish the Fed. Stop poking the economy."

What are you guys offering that differs from 2007-era policy, except obsessions with minor subsidies?

How about government stop "encouraging" the economy to act in certain ways? Then we won't get government-created bubbles and financial crises.

[Calidissident]

Sometimes I seriously think Tony is just a regular trolling us. How can he possibly be asking us how OUR policy differs from the 2007 policy when his policy is essentially the exact same thing but with the Right People in charge.

Oh and Tony, absence of a rule is not a rule any more than inaction is action. Also, most of the banks at the center of the crisis were not merged commercial and investment or if they were, there's no proof that fact had anything to do with the crisis

[Corning]

And what's so difficult to grasp about a deflationary spiral? Lower wages (demand) lead to lower prices which lead to lower wages which lead to lower prices, etc. Why is that not possible?

The law of supply and demand.

If prices go down (how did they go down anyway?) then producers stop producing. Demand staying constant but with less goods being produced the price will go up...and so ends your weird farce you described above.

Anyway what you described is not the deflationary spiral anyway.

[jester]

A market is simply a market. It doesn't 'fail' and it doesn't 'succeed'. It's a market for fuck's sake.

[jester]

A market is simply a market. It doesn't 'fail' and it doesn't 'succeed'. It's a market for fuck's sake.

[John Thacker]

Deflation is a result of an economic slow down not the cause.

Deflation is often the result of economic advancement.

When Aggregate Supply increases, such as when technology improves and new goods exist, then prices fall. When supply decreases, then prices rise.

However, demand works the opposite way.

A priori, it is difficult to tell if deflation is "good deflation" from an increase in aggregate supply, or bad deflation from demand decreasing.

[Corning]

If inflation is a monetary phenomena isn't deflation one as well?

I honestly don't know.

Anyway what you are describing is the lowering of prices because stuff got cheaper to make.

What I am describing is stuff got cheap because a whole bunch of wealth got destroyed so there is less money to buy stuff. So less stuff is bought and holders and producers of that stuff must lower their prices in order to sell it.

[Sam Grove]

What I am describing is stuff got cheap because a whole bunch of wealth got destroyed so there is less money to buy stuff.

Repeat after me:
Money is not wealth.

Wealth can be destroyed without any change in the money supply. This happens all the time.

[Corning]

Money is not wealth.

Less wealth to buy stuff.

[Cytotoxic]

Less money to chase the stuff.

[OldMexican]

Re: John Thacker,

Deflation is often the result of economic advancement.

You're confusing terms, John. Deflation is the market finding the true value of assets after the previous period of inflation. What you're talking about is lowering of prices by increased supply/increased productivity. They're entirely different phenomena.

Deflation is neither good or bad: it is simply the result of the previous period of inflation, when bad debt and malinvestment is liquidated, the multiplier effect stops when banks stop lending and thus the money supply contracts towards the correct level (not the phony level found in the cooked balance sheets of banks.)

Deflation is like the period of fever during sickness, but you should never, ever, confuse it with the sickness itself. The more the Fed tries to inflate to stop the deflationary process, the worse the deflationary process will be or, worse: When asset prices find their true level, then you could have a period of HYPERinflation as more money is pumped into an economy that refuses to reinflate the bubble - this is to what Peter is alluding.

[Contrarian P]

Given that the real estate bubble collapse and its associated bad investment (derivatives) were the leading drivers of the recent economic downturn, I'd say his emphasis is quite appropriate, especially since the Fed seems quite fixated on aligning their interest rate policy to keeping mortgage rates low. As to your last paragraph, what sensibility on inflation, recession, and money would you like to see?

[Dunphy (the real one)]

and one shoudnt think for a second that its a bad thing that the RE market corrected. it showed a period of unsustainable gains. a subsequent crash was both inevitable and desireable

when the cost of a started home becomes too high a multiple of starter family income, that's bad mknay?

it was only tolerable due to greater fool predictions by buyers.

[T o n y]

Otherwise plausibly described as either exploitative lender practices or, ta da, a market failure.

[John Thacker]

Although one aided and abetted by government practices. The government responded to homes getting unaffordable by helping people buy those unaffordable homes, pushing prices higher.

It does no good to spot a market failure if the inevitable response of pro-intervention politicians (on both sides of the aisle) is to make that failure worse. If something is bad, first do no harm, at least.

Find me a politician in the 2000s saying that home prices need to drop.

[Dunphy (the real one)]

it's not a failure. it was a good thing it happened, and it's SUPPOSED to happen. that is in no way a failure. it's what is SUPPOSED TO HAPPEN. if prices KEPT going up, THAT would be a far worse unsustainable failure

[T o n y]

Suggesting that there could have been a point where the same sentiment could be held, and prices could have been recognized as irrationally inflated. That would require policy to correct--waiting around for the crash is a policy, but it's impossible to see why it's the best one.

[Contrarian P]

No, that would require abandoning a policy that never should have been put in place to begin with and having the good sense never to do it again.

[Dunphy (the real one)]

not a market FAILURE at all. it was supposed to happen, and it's a good thing that it did

that is not a failure

it may seem so to those that overbought, near the top and overleveraged, but tough cookies.

you buy overbought assets , especially with leverage, and that's a suboptima INJVESTMENT

however, first and foremost a home , especially a starter one should be a shelter, not a greater fool theory investment vehicle

hth

[T o n y]

Even if you pin all the blame on homebuyers, their inability to act rationally en masse is the definition of a market failure. Of course leaving out exploitative lending practices and investor irrational exuberance certainly sets the moral universe in a certain convenient way for those actors. Either way, there was nothing optimal about the results. Optimality must eventually consider the real lives of human beings--it can't just tautologically be whatever happens in the market.

[Dunphy (the real one)]

let's not play the strawman game . i didn't bother to pin it on anybody, cause it's irrelevant to my point and shit

it wasn't a market failure. it did EXACTLY what it was supposed to do

and it was a good thing

i don't care if the blame is placed on gingers.

it makes fuck all difference as to the point
(i mean, lets get real. mofos have no soul)

[T o n y]

If exactly what was supposed to happen happened, then surely you have nothing to bitch about regarding employment. Is high unemployment a good and rational corrective to a bubble? You still seem to be saying that whatever happens in the market is good--whereas I prefer to make human suffering or prosperity the top consideration.

[Contrarian P]

Nobody is pinning all the blame on homebuyers. Who can blame people who have been fed a mythology for years that they should buy a home as big as they can afford for buying a home as big as they were told by the bank that they could afford? Yes, they should have known better, but being told over and over by your government and everyone else that owning a home is the American dream, that home prices always go up, and so forth does tend to make one believe that buying a big house is a great idea. The government's guarantee of easy credit to buy a big home made it possible for people to be dumb. Again, why is it so hard for you to understand that without the government guaranteeing the loans, they never would have been made?

[T o n y]

What do you mean by government guaranteeing the loans?

Yeah we both agree that bad government policy allowed unwise and system-fucking loans. But there's no such thing as no policy on lending. The data says that government housing incentives didn't play nearly the role that government laxity on derivatives did. We both agree that bad policy is to blame, but the scheme you seem to think is best, less government, means in practice exactly the same policies that caused the problem.

[Jordan]

They were acting rationally, based on the incentives put in place by the Fed and Congress.

[Sam Grove]

Markets don't fail, they react.

What fails is any attempt to avoid the reaction.

[T o n y]

If markets can't fail then you are failing to provide a nontautologial definition of the good. "Whatever happens in the market" can't be defined as the good. The good must involve such things as the well-being of human beings.

[Sam Grove]

"Whatever happens in the market" can't be defined as the good. The good must involve such things as the well-being of human beings.

This misapprehends the nature of the market.
"Good" or "bad" are not useful terms for describing markets. It's more like weather, a storm may be good for some or bad for others, but describing storms as good or bad does not inform us how to weather storms.

The market is a term of convenience to refer to the economic activities of humans. There are laws of economics that must be observed for people to obtain their desired results.

What matters for economic functioning is the incentives that people face in their economic actions. In a free market, with "government" prohibiting people from violating each others rights, the incentives produce a certain set of behaviors. In a politically managed market, there are other incentives which produce a different set of behaviors.

I'll quote PJ O'Rourke here:

"When buying and selling are controlled by legislation, the first things to be bought and sold are legislators."

[OldMexican]

Re: Tony,

"Whatever happens in the market" can't be defined as the good.

Of course it can. The market is the result of choices, and choices are the result of people pursuing their own interests. That cannot be described as "bad."

The good must involve such things as the well-being of human beings.

By whose opinion? Because only the individual knows what is being well for him or her, not YOU for him or her, unless you presume to be able to read minds.

[Sam Grove]

Home buyers and other actors acted rationally to incentives. It was the incentives that were irrational, and these irrational incentives were put in place via the political edifice which gives people the illusion that they can make the market work always favorably to themselves without actually producing the effort required.

[Tim Cavanaugh]

Given that the Chairman of the Federal Reserve has stated his intention of boosting real estate prices, it is not off-base to say monetary policy as of 2012 is, in fact, about housing prices.

And this still makes no sense. If I were too focused on real estate then I would be screaming about "deflationary shocks" and "cratering demand" and all the other garbage the macro crowd is exercised about. Real estate is the only thing that has actually deflated in the last five years. That's the problem (discussed in more detail elsewhere in this thread).

[T o n y]

It is the problem and it's a real problem--which is to say there is no clear way out of it that doesn't involve housing. I'm all for treating houses as just another market good, but must then support some policy that improves demand to the extent that houses as mere goods become widely affordable (to only a certain extent--I'm no fan of suburban sprawl).

There was a more pure market equation in this country that allowed for widespread homeownership. The variable was income distribution. The historic disparities we have experienced the past few decades has to be seen as the heart of the entire problem.

[Francisco d Anconia]

$

[Cytotoxic]

Bullshit. Home ownership does not create economic prosperity and 'income distribution' does not create homeownership. Can you please take your ignorance shits somewhere else?

[juris imprudent]

[applauds]

Seriously T o n y, I don't think anyone could have posted more confused bullshit in less space then you just did. Well played.

[johnl]

Exactly. It's easy to blame the Fed for lowering interest rates in the 2000 recession, to try to create a boom in housing (a policy endorsed by at the time by Krugman). Or to blame the housing bubble for the recession of 2008. Too easy. The real problem that's been holding back economic growth not just since 2008, or even 2000, but at least since 1965, is Tim Cavanaugh.

[wef]

Citing a prince of conventional macro wisdom, Greg Mankiw, is safe, but worthless these days. Conventional macro is in disarray. And that Mankiw is linked to George, I've abandoned free market principles to save the free market system, Bush should be at least a slight embarrassment.

But it's an appropriate time to plug Lawrence White's The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years I would like to see Mr. Cavanaugh do a review of the book, and maybe an interview with the author.

[juris imprudent]

Lots of liberals have serious hots for Mankiw these days. I suspect it is much like all the love for Reagan they express too.

[Corning]

The interventionists' pants-soiling bloviation about deflationary catastrogeddon is in its way the flip side of the claims by Schiff and others that hyperinflation is right around the corner.

Does hyperinflation have a specific meaning? Can it simply be when inflation is higher then growth of wealth?

Tim you did mention that Americans lost 40% of there household wealth and that prices have risen 10% over the past 4 years.

How is using the term "hyperinflation" to describe the above inaccurate?

[John Thacker]

that prices have risen 10% over the past 4 years.

How is using the term "hyperinflation" to describe the above inaccurate?

10% over 4 years (which actually overstates it a bit) is pretty low inflation.

[Corning]

is pretty low inflation.

You left out the first part of my sentence.

Tim seems to get my meaning. Read what he wrote below.

[Tim Cavanaugh]

How is using the term "hyperinflation" to describe the above inaccurate?

Believe me, I'm inclined to agree with this. If you're making the same as or less than you were making in nominal dollars as of 2007 (the case for most Americans), and your net worth in nominal dollars is down by 40 percent or more (ditto), then the fact that your 2007 dollar now only buys 90 cents means you are effectively experiencing unmanageable inflation, in the sense that your buying power is drastically lower.

But here's the rub: Real estate has in fact undergone a substantial deflation since 2006. It's still only about half the deflation it would need to get us back to historic trendlines, but it has been a deflation nonetheless. So you have to take that into account.

Basically it's the worst of everything: The asset most people rely on as their wealth-creation vehicle (leave aside whether it was wise to view it as a wealth-creation vehicle) has lost at least a third of its value, while the cost of day-to-day living has risen at least 10 percent (more if you throw in all the stuff that gets excluded from "core" CPI, which just coincidentally happens to be all the stuff you need to avoid starving to death or freezing to death).

[TigWow]

Sounds like some serious business to me eude.

http://www.AnonWorld.tk

[Dunphy (the real one)]

it's also perverse, and would likely only be seem in a public employyes union during the same time period but we saw a 3p% range in the same 6 yrs.

wtf?

(no, i did not give it back)

[John Thacker]

Deflation is fine, if it's caused by rapidly expanding real GDP, such as caused by great technological progress. In fact, it's a sign of great things, if there's an expanding money supply but still deflation. That means that the amount of goods supplied is expanding so rapidly that prices are falling even though money supply is increasing, just not as fast.

Nominal GDP = Real GDP + Inflation. Nominal GDP is the supply of money times its velocity, the measure of the amount of money moving through the economy.

What you don't want is the actual money supply or nominal GDP to decrease. That's a different issue. The reason that's a problem is because people really don't like their wages to go down in nominal terms, and they really, really don't like their savings rate at a bank to go below zero (especially when cash exists), and both of those things have to happen if the amount of money moving through the economy decreases. You especially don't want this to happen unexpectedly, since then public sector employees will have union negotiated contracts guaranteeing them raises, and bondholders will have long term bonds, and it will be private workers and debtors having to pay far more than their share.

It's 100% the case that the best economic times in the world, the times of greatest increase in technology and goods supplied, had deflation. But that doesn't mean that deflation caused that. The growth in real GDP caused the deflation.

[Tim Cavanaugh]

Thanks.

One other weird thing about deflation discussions: Macronauts always make the reasonable-sounding concession that yes, there's nothing wrong with deflation per se; it's just "rapid deflation" under "shock conditions" or something that's the problem. But we've now had more than half a decade of stagnation, coupled with a 10 percent increase in CPI/PCE. So if there hasn't been deflation in this period, under what circumstances could deflation, manageable or not, ever occur? Would it be catastrophic if your dollar bought 1 percent more today than it did in 2007? How about 2 percent? When nobody's earning any more, what would constitute an acceptable, non-catastrophic increase in buying power?

I don't believe there is any level of deflation, under any conditions, in good times or bad, that macronauts would ever consider acceptable.

[T o n y]

The argument is deflation discourages private investment and harms debtors, and while there is a theory that with little debt deflation can be beneficial on the whole, even Hayek says: "No one thinks that deflation is in itself desirable." Deflationary periods have always coincided with decreasing social conditions in this country, and that should be the most important bit of evidence. The risk of a deflationary spiral, most economists think, is always present with any deflationary period.

[Sam Grove]

Carts and horses.

[Corning]

The argument is deflation discourages private investment and harms debtors

So by the law of supply and demand:

With discouraged private investment there will be less private investment. Demand being the same the value of private investment will go up thus encouraging private investment to levels that the market demands.

Debtors are hurt so people demand less debt loan makers have less customers so then then they have to lower the price to debtors in order to encourage new customers.

It is almost like an invisible hand is moving about the market fixing all the wrongs that Tony can find.

By the way Tony Private Investors and debtors are rich people. Why the fuck do you care about them so much? We all know inflation hurts the little guy. Why are you advocating away from your own interests?

[OldMexican]

Re: Tony,

The argument is deflation discourages private investment and harms debtors,

It may harm debtors but why would it discourage investment? It would certainly discourage malinvestment, but not investment per se.

Deflationary periods have always coincided with decreasing social conditions in this country,

So what? You're confusing cause and effect: The deflation is the correction from the previous period of inflation. It is the period of fever that comes with the sickness but not the sickness itself. It is the market finding the proper price levels of assets after all the bad debt is liquidated and the true money supply is discovered.

The risk of a deflationary spiral, most economists think, is always present with any deflationary period.

Yeah, most economists that are bought and paid for. Austrian economists (that is, true economists) will tell you that the apparent "pain" is only temporary until the market finds its true level and accurate asset values are discovered by the market.

[wef]

You are unusually mild in your tendentiousness today. You are improving. Keep up the effort.

As to Hayek, note that he said in itself. Of course. Changes in price indices in one direction or the other are not informative.

As to the claim that deflationary periods "coincide with decreasing social condition," aside from its awkward phrasing, is simply untrue. Deflation - a general fall in prices - under the hard(er) money standard between 1870 and 1914 was due to steady and remarkable productivity gains. Living standards increased, with hiccups certainly, but increased steadily. In fact, and in theory, general price declines are the most natural and neutral way for productivity increases to be communicated to all in a market economy.

The so-called deflationary spiral - a broad and precipitous general fall in prices - is usually (and maybe always) caused by a money deflation, a credit collapse. In fact, I would say that much of our present confusion regarding inflation/deflation and monetary policy is due to this conflating of money/credit expansion or contraction with price index changes.

What is certainly true is that unexpected declines or spikes in the general price level is undesirable.

[SIV]

Inflation = good
less than 2% inflation = deflationary threat
disinflation = deflationary spiral
deflation = Death of Civilization if not the total extinction of the human species

[darius404]

deflation = Death of Civilization if not the total extinction of the human species

So, you're arguing that environmentalists should regard deflation as an unmitigated good? Yes, unexpected allies!

[OldMexican]

Re: John Thacker,

The growth in real GDP caused the deflation.

NO. That is NOT deflation. That is simply the lowering of prices through increased output. DEFLATION is the constant decrease in the money supply as bad debt is liquidated and the phoney assets in the cooked balance sheets of banks are snuffed out. Deflation is the market trying to find the proper value of assets AFTER the previous period of inflation. But it has NOTHING to do with higher output - you're talking about two different phenomena.

Deflation is not bad, and it's not good: It is simply what happens after the folly of central banks. It is the necessary correction, the period where markets try to find the proper valuation of assets. It's like the hangover from the previous binge: painful, but inevitable.

[johnl]

What you are calling deflation is a drop in prices. What Austrians call inflation is a drop in the money supply.

[wef]

Regarding the deflation/inflation question, one might want to read George Selgin's Less Than Zero: The Case for a Falling Price Level in a Growing Economy

http://www.amazon.com/exec/obi.....TUCCVJ7DGE

Selgin, who I think deserves more attention, argues for a "productivity norm." He says somewhere that in fact Keynes had set out a type of productivity norm that would stabilize an index of money wages.